Monday, November 30, 2015

So what happens when an insatiable state-mandated cartel attaches itself to households with declining real incomes?

Why the coming Great Recession is brought to you by the Healthcare Cartel is painfully simple: in an era of stagnant household incomes, every additional dollar devoted to rising healthcare insurance, outrageously unaffordable medications and soaring co-pays is one less dollar that's available to be saved, invested or spent on something other than healthcare.

Recent headlines tell the story: off-patent medications suddenly leap in price, healthcare premiums jump 25+% in a single year, co-pays increase and the deductibles on many insurance plans are so high that the coverage is more phantom than real: if you have to spend $5,000 before your insurance plan pays $1, what value is the coverage?

If the plan costs $5,000 a year, but doesn't pay a dime of expenses until you've spent $5,000, then the plan actually costs $10,000.

No wonder rising healthcare costs are tightly correlated with recessions, as longtime correspondent B.C.'s chart reveals: as healthcare expenses consume more oxygen, the rest of the economy starts gasping for air:

Total healthcare expenditures are generally under-estimated, distorting the full consequences of soaring healthcare:

Adjusted for inflation, healthcare expenditures have risen 55% since 2000:

Compared to our developed-nation competitors, the U.S. spends an inordinate amount of healthcare spending on the elderly. Why? because it's so profitable, and the federal government pays the bills, no questions asked--even when the billing is fraudulent or inflated, or the medications and procedures are needless or even harmful.

So what happens when an insatiable state-mandated cartel attaches itself to households with declining real incomes?

There is less money to spend in the rest of the economy, which stumbles into recession.

The game of enabling more debt by lowering interest rates and loosening lending standards is coming to an end.

If we define Christmas as consumer spending going up while earnings are going down, 2015 will be the last Christmas in America for a long time to come. In broad brush, Christmas (along with all other consumer spending) has been funded by financialization, i.e. debt and leverage, not by increased earnings.

The primary financial trick that's propped up the "recovery" for seven years is piling more debt on stagnating incomes. How does this magic work? Lower interest rates.

In a healthy economy, households earn more money (after adjusting for inflation, a.k.a. loss of purchasing power), and the increased earnings enable households to save, spend and borrow more.

In an unhealthy, doomed-to-implode economy, earnings are declining, and central banks enable more borrowing by lowering interest rates to zero and loosening lending standards so anyone who can fog a mirror can buy a new pickup truck with a subprime auto loan.

The problem with financialization is that it eventually runs out of oxygen. As earnings decline, eventually there's no more income to support more debt. And once debt stops expanding, the economy doesn't just stagnate, it implodes, because the entire ramshackle con game of financialization requires a steady increase in debt and leverage to keep from crashing.

The trickery of substituting financialization for earned income--the trickery that fueled the last seven years of "recovery"--is exhausted.

The incomes of even the most educated workers are going nowhere, while the earnings of the bottom 90% are sliding:

Wages as a percentage of gross domestic product (GDP) have been declining for decades. Note the diminishing returns on financialization and asset bubbles that always bust: wages blip up in the bubble and then crash to new lows when the bubble bursts:

Look at how debt has soared while GDP has essentially flatlined. This is diminishing returns writ large: we have to pile on ever-increasing mountains of debt just to keep GDP from going negative.

This dependence on debt for "growth" leaves the economy exquisitely sensitive to any decline in debt growth. The slightest drop in debt growth in the Global Financial Meltdown almost collapsed the entire global economy:

The essential fuel of "growth"--credit expansion--is rolling over:

Even the vaunted prop under a soaring stock market, corporate profits, are rolling over as the stronger dollar and stagnating sales pressure profits:

The game of enabling more debt by lowering interest rates and loosening lending standards is coming to an end. Debt is not a sustainable substitute for income, and households are increasingly finding themselves in two camps: those who can no longer afford to borrow and spend, and those who recognize that going in to debt to support spending is a fool's path to poverty and insolvency.

Say good-bye to Christmas, America, and debt-based spending in general--except, of course, for the federal government, which can always borrow another couple trillion dollars on the backs of our grandchildren.

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Saturday, November 28, 2015

It takes a number of things to make healthy home-cooked meals: the will to do so, knowledge, organization, experience and a few good kitchen tools. Young people who didn't grow up cooking and baking often lack all five essentials. It's hard to cook if you don't have a decent knife, vegetable peeler, containers for leftovers, and so on.

One of the secrets of being to cook/bake across a wide spectrum of cuisines is having the tools to do so within reach. The same is true of preparing a meal for guests: having all the tools makes the process of prepping several dishes much easier and faster.

I am a fan of home-made gifts and of tools that will last and be useful in everyday life. These 10 kitchen tools are not only useful, they're inexpensive (between $5 and $27) and well-made (mostly made in the USA).

Many of the ills of our society are best addressed in the kitchen, as eliminating fast food, junk food and convenience "food" is the first step to becoming healthier. The second step is do the thing and you shall have the power, i.e. turn off the generally-useless TV celebrity-chef cooking shows and get to work making real food.

NOTE: prices of these items change frequently and may vary from those listed here.

These 3 round bowls and 2 rectangular glass storage containers are just the right number and size for storing leftovers – practical and perfect. We all already own similar containers with lids (usually larger) but I now use these the most – one or two are always in use in our refrigerator. Bought my Mom a set, and she says it’s always going up and down the road as she and her neighbor Gene trade dinners. Just bought a set for Gene in September as a gift.

I was introduced to this practical Rubbermaid set 2 years ago by my friends Dustin and Megan who received them as a wedding gift. They remarked "you should get this" -- I have since bought 3 sets for myself and as gifts. Yes, we all already have innumerable plastic food storage containers and resist adding more to our jumbled drawer-full. However, the clever system of locking the matching lid to the bottom of the container so they stay together convinced me to buy this set to add to our kitchen.

I have owned Best whisks from the 70s since learning about them in the Whole Earth Catalog. Thankfully, still USA made and indeed “crafted” (as described on Amazon) in Portland, Oregon, they are indeed the best. You will likely not need to replace a Best whisk in your lifetime. I personally prefer the 10” for home use.

Over 300 "5 star" reviews for with handle and 44 "5 star" reviews for without handle can’t lead you astray. Being a stubborn Taurus and loyal to my traditional zester, I resisted this "new fangled" zester. A gift from my sister Lynette proved me absolutely wrong, and I now cannot do without it for grating lemon zest, nutmeg, and hard cheese. Great for hard baking chocolate as well but I usually bake with cocoa power. I prefer the clean, simple look of the zester without a handle – just my Taurean preference.

I was drawn to this zester for another reason--its lineage as a wood rasp/carpentry tool.

Our Irish green 4" Swiss peeler hangs on a cup hook above our sink – such a fine, sharp tool for peeling carrots, potatoes, long white Asian radish for Chinese/Japanese/Vietnamese pickles, Fuji apples for pie, the thin brown flesh off fresh coconut before grating, and hard skin off Asian pumpkins prior to steaming or cooking, Recently, I discovered the peeler efficiently remove the tough green skin of loofa squash – a vegetable new to me (previously I only used the dried version as a bath scrubber), and delicious prepared Chinese style with "tree ears" black fungus and green beans.

Wonderful scoop for quick portion measuring of cookie dough, drippy muffin batter and Indian kofta meatballs. Two scoops of batter fills each paper lined muffin pan cup perfectly for perfect cupcakes. I like the medium size which makes for 4-across and 5-rows down size cookies on the cookie sheet. If you tend to bake smaller, more delicate sized cookies, you may prefer the small scoop. I bought the medium and small scoops, but found the small too small and gave it to a friend who likes making smaller cookies.

Now darkened with patina -- another tried, true and beautifully made kitchen tool in my culinary tool box for 35+ years bought from Kaya Cutlery on Mamo Street in Hilo, Hawaii –- wish I had marked the purchase year on the rosewood handle edge. An essential dough cutter and wood cutting board scraper for bread, pie crust and cut-out cookie makers, it’s made of 3 excellent timeless materials –- stainless steel (blade), rosewood (handle) and 2 brass pins (to connect blade to handle).

This Dexter-Russell product was not always available on Amazon, and after reading a single negative Amazon review dated February 2, 2010, I settled for an imported Oxo dough cutter/scraper for a friend’s wedding gift.

Actually, that one poor 2-star Amazon review of this S496 Dexter dough scraper/cutter mystified me because the one I own is such an excellent product. Like so many other reputable USA companies making previously well-make products in America, I surmised that Dexter-Russell had succumbed to global pricing pressure and now resorted to foreign manufacturing of their products.

Recently, while researching products for this list, I noticed a 5-star review added by P. Brady who declared this product "very well made and a worthy piece of equipment for professional use." His comments express my own sentiment. Still, I wanted to be sure before recommending the dough scraper. The disparity between 2 and 5-stars prompted me to search online for the Dexter-Russell company website and to call their Southbridge, MA phone number 1-800-343-6042 FREE.

Pat, who has worked for the company for 14 years, assured me that the S496 dough scraper has always been made in their Southbridge, MA location -- never manufactured abroad – and always with the same 3 fine quality materials of high grade stainless steel, rosewood and brass.

One last comment -- As P. Brady notes, the handle is made of rosewood, and not walnut as described by Amazon.

Heard frequently in our home: "Where’s the red knife? Have you see the red knife? Do you have the red knife?" -- Our Victorinox paring knife happens to have a red rather than black handle, and it is our go-to paring knife. It was moved to California with me from my Mom’s home in Hawaii 28 years ago –- we had 2 and my Mom still has the black-handled knife in her left kitchen drawer. It’s simple, practical and sharpens easily with our knife sharpening stone. We use it for everything that calls for a paring knife, and daily for scraping skin off a knob of fresh ginger destined to be grated for Charles’ morning ritual of fresh ginger tea following his wake-up coffee.

Probably like many other people, I too have several "the last knife I’ll ever buy" knives. So I hesitated to add yet another kitchen knife to our collection but it is in fact a knife I use often (favorite very sharp knife for cutting onions) + inexpensive + American made. No one I personally know recommended this knife to me. At first the name caught my attention online -- Rada is the name of my South Indian friend who prepares the South Indian specialties at a restaurant consistently listed on the top 100 San Francisco Bay Area Restaurants list.

Then the Amazon buyer reviews and USA manufacture origin got me curious enough to order the knife and sharpener for myself. Whether a tool is an excellent addition to your kitchen is determined by how often you use it and whether it supercedes your last favorite knife –- if you find yourself reaching for it. I now use my Rada more often than my assorted German and Japanese knives that cost 5 to 7x the Rada knife's price.

The Rada blade is sharp, stays sharp and easily sharpens with 2 to 3 pulls between the 2 sharpening wheels. You must be attentive and treat the Rada knife blade like a razor. As noted by other reviews, the blade is thin and not suitable for cutting hard vegetables. For hard skin squash or Asian pumpkin, my Chinese cleaver or German knife gets pulled off our wall magnet knife holder.

10. Egg Poaching Pods, Fusionbrands, Set of 2, Green - $8.01
Another "new fangled" device made of flexible silicone to cook old-fashion poached eggs. I had to get one for our kitchen as soon as my friend Dustin gave me a demonstration in his kitchen -- extra virgin olive oil smeared into the pods, sprinkling of kosher salt, and several turns of fresh ground black pepper all sealed with a cracked egg on top.

After 4 minutes floating and simmering in a lidded pan, they were done perfectly and easily popped out of the pods. No more watery poached eggs + losing 1/3 of the whites as they float off as whitecaps into the simmering water. I've given a number of these as gifts to family and friends –- thank you, Dustin, for introducing us to this easy method for poaching eggs.

The list was assembled and submitted by C.N.F.

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Thursday, November 26, 2015

A move above current levels in the US Dollar Index would cause tremendous pain for many participants.

Let’s start our examination of the U.S. dollar (USD) by recalling the chart from my August 2014 essay, Why the Dollar Could Strengthen—A Lot. At that point, the USD had moved modestly off its lows, and had yet to challenge long-term resistance around 80.

Here’s the same chart of the Real Trade-Weighted U.S. Dollar Index now:

The USD broke out of its multi-year downtrend and soared above 100. Needless to say, the USD did in fact strengthen a lot. After that initial leg up, the dollar has remained in a consolidation range for much of 2015. Though it recently broke out of a wedge/triangle formation to the upside, it’s not yet clear if this is a definitive move higher or more consolidation.

Our first observation is that trends in the USD tend to last for some time, so if this rally follows the pattern of previous rallies, it’s unlikely to have run its course in one year.

Secondly, previous rallies paused for a multi-month consolidation period before launching upward for the second leg of the long-term rally.

Thirdly, the USD rose sharply to previous peaks and then round-tripped back to the 80 level.

This raises the question: How high could the dollar rise in this rally?

How High Could the USD Go?

How high could the USD rise before it tops out? Last November, when the dollar had just punched above 85 for the first time in years, I posted this chart that suggested 120 was “not impossible:”

The current rally has already made it halfway to this target (from sub-80 to 100+). If we look again at the FRED chart above (the current Real Trade Weighted Dollar Index), we see that the consolidation periods have occurred roughly mid-way in the rallies. This is supportive of the idea that the initial 20+ point advance could be followed (after the consolidation phase ends) by another leg higher of approximately the same size (20+ points).

That would get the dollar Index to the 120 target.

Beyond 120, there are additional “impossible” targets defined by previous rallies: depending on the chart (Real Trade Weighted Dollar Index from FRED, DXY or USD on charting services), these targets range from 130 to 165.

Who Would Suffer If the Dollar Moved Higher?

A move above current levels around 100 would cause tremendous pain for many powerful participants. U.S. global corporate profits, already under pressure from the stronger dollar, would suffer from the worsening exchange rate, and that would pressure U.S. stock markets that are at least theoretically based on profits.

Recall how FX (foreign exchange impacts U.S. corporate profits:

Major American corporations get 40+% of sales and 50+% of profits from overseas markets denominated in other currencies.

One euro of profit earned in the EU translated into $1.40 in profit a few years ago. Now the same 1 euro of profit converts to a mere $1.07 in profit when stated in dollars.

The effects of the stronger dollar on profits is visible in this chart. Note that while pundits and apologists are quick to blame “weather” for lagging sales, corporations overwhelmingly identified the rising USD as the cause of profit warnings, not the weather or geopolitical issues.

Everyone who took out loans denominated in USD while their revenues/earnings are in a currency that’s losing value against the dollar will suffer as well.

If an enterprise earning euros borrowed in dollars when the euro was 1.40, consider what happens to their USD-denominated loan payments now that the euro is 1.07.

Where is once took only .72 euros to pay $1 in principal and interest on the dollar-based loan, now it take .94 euros to pay that same $1. That’s a 30% increase in loan payments, just from the rising dollar and the declining euro.

This dynamic is even more punishing to those who borrowed dollars to fund carry trades in other currencies.

If the currency the bond is denominated in rises in value against the USD, traders get a bonus gain from the appreciation. For example, those who borrowed yen to buy U.S. Treasury bonds have reaped a nice profit as the USD has rocketed higher against the yen.

But the reverse is less pleasant. As the USD rockets higher, the profits earned in weakening currencies decline when stated in dollars, while the amount due on the dollar-denominated loan has soared when the payments are converted to the local currency.

Using our euro-USD example: the profit on the carry trade plummets (when converted to USD) while the amount of euros needed to pay the loan in USD soars.

A rising USD is a double-whammy to carry trades based on borrowed dollars.

The sums of money being gambled in carry trades are enormous. According to the Telegraph newspaper (U.K.), roughly two thirds of the $11 trillion in cross-national loans are denominated in U.S. dollars. That suggests that over $7 trillion in carry trades have turned sour.

If the dollar continues rising, those sour carry trades quickly become catastrophic for everyone who borrowed dollars to buy assets in a weakening currency.

Everyone who took loans denominated in dollars needs dollars to service the loan and pay it off. That demand is clearly one factor pushing the USD higher.

In Part 2: Why The Coming Currency Crisis Will Push The USD Higher, we detail why we can anticipate the next global financial crisis will originate in the currency market, and how this will inevitably push the USD higher, which will increase the pressure on carry trades, adding fuel to the USD fire. Perhaps ironically, a much stronger dollar will put tremendous downward pressure on U.S. stock markets in 2016.

The print edition is $25, but there's a $6 discount through my publisher's page for the book: you must use the code JPW86XRB to get the $6 discount. Note this does not include shipping, and requires making the purchase through Createspace.

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